Copper hits final frontier of resistance

The copper index has hit the final frontier of resistance in the 450-range this week, as buyers rush in where angels fear to tread. The 450-level has proven to be a price point where supply exceeds demand.

Right now people are buying in anticipation of a further rally, but are paying a high price. The ideal strategy should be to buy pullbacks or wait for a break-out of resistance and then buy when prices fall back to it. From the current levels, there is a very high likelyhood that prices will correct.

The 450-range is critical. Our study of the copper index chart shows that prices never closed above 467. On May 6, 2008, the index rose all the way to 488, but was not able to close above 467. This week the index has reached the 450-level with a gap up, which usually is an indication that final buyers are rushing in as they are afraid that they will miss the rally.

Professional money managers call this a retail gap that happens after a long term rally in price into a key area of supply.

Is it possible for copper to rally further?

They say anything is possible in the markets but the probability of decent correction from 450-467 is more likely than a rally above it. Fundamental experts state that the price of copper is rising as economy is picking up. These are the experts who make “bold” analysis after the move has happened. They try to assign reason after the fact.

It’s true that the economic fundamentals are improving, but to assign that reason for the rally in copper does not support the facts. Here is the first fact. The price of copper bottomed in December 2008, and began rising. The economy was in a funk with the equity markets dropping till March 2009. So the price of copper was rising even though the economy was doing poorly. Here is the second fact. The economy right now is not as good as it was during the boom, three years back. They why should copper reach its previous high?

The simple fact is that prices rise not because the economy is improving but in anticipation of an improvement. Based on that anticipation, people buy copper leading to a price increase. Now that prices have reached an area where supply exceeds demand, we could see a correction. We believe 450 is an area of oversupply as prices fell from that level to new lows in 2008.

Technically speaking too the indicators point to weakness. The Bollinger Bands show that copper is overbought. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band. The upper and lower bands are standard deviations to a 20 period moving average. Right now, copper has penetrated the upper band.

Also the commodity channel index shows weakness in copper. This is so as the indicator is moving down, even though the index is moving up. All these facts call for caution on the part of copper bulls.

The author is based in Chicago and is the editor of www.capturetrends.com